11 Aug 2010

Mervyn King’s austerity assessment is music to the coalition’s ears

So the Bank of England has downgraded its central prognosis for UK growth by almost one percentage point in 2011 – from 3.4 per cent in May to about 2.5 per cent. And its central inflation forecast has nearly doubled for 2011 from 1.4 per cent to around 2.8 per cent.

So both main gauges of economic health going in the wrong direction: on the face of it a pretty disturbing verdict on economic developments since May, including of course the coalition’s emergency budget.

But the striking thing about Mervyn King today was his absolute unwillingness to countenance the idea that austerity had in itself created new risks for the economy. He rightly pointed out that the austerity impact on reducing growth had to balanced off against the positive impact of reducing the risk of a UK government debt crisis. However he suggested in today’s press conference that these two factors “broadly offset each other”.

This assessment will be music to the coalition treasury’s ears. But it’s also a big call at a time when many measures of business and consumer confidence are tanking. Chris Williamson, the man from Markit PMI, which runs the landmark business and consumer confidence survey, told me today about record falls in some of his confidence measures, attributing them directly to the emergency budget.

Against a backdrop of notable double dip caution from central banks around the world, the Bank of England’s stance is, as he argues, “relaxed”. Other economists point to the fact that the Bank’s charts show a marginal move from being more concerned about inflation towards being more concerned about growth and offering the possibility of further money printing.

So the big picture from the Bank of England inflation report is that there are concerns about growth, but Mervyn King went out of his way not to pin this on the austerity budget.

The bigger picture is that one sort of risk – a sovereign debt risk – has been swapped for another sort of risk to consumer confidence. The Bank has backed up the coalition’s view that the first risk was more dangerous and damaging than the latter. As I put to the governor himself, that is a judgement call.

6 reader comments

  1. CharlesJ says:

    I predict a 40% chance of recession this year, and a 90% chance next year. Of course if the BoE use QE again, that might improve the situation slightly (though QE is very inefficient and only really buys us time)- and of course, if the government abandon its silly cuts, then we might just carry on bumping along the bottom, instead of recession.

    Look out for substantial homelessness next year.

    1. Tom Wright says:

      You are right about the rise in homelessness. Cutting housing benefit is going to hurt a number of people and there’s no hiding from it.

      However, there’s also no hiding the uncontrolled spirallng billions that housing benefit has poured into the property market, or the crippling distorting effect that this massive state intervention has had on rental and buying prices.

      It was banks speculating on the housing market that caused the recession, and Housing Benefit that sustained the bubble that made that speculation worthwhile.

      Housing benefit is a downward spiral. The more people claim it, the more tax money pours into the property market, and the higher rent and mortgage costs become; so the more housing benefit needs to be paid out. The reason UK rents are so massive is Housing Benefit. If we are to stop the banks & landlords fleecing us in mortgage interest or turning us over for the sky high rental on a one room bedsit, then Housing Benefit must be cut. Period.

      Ask yourself: if the recession truly was the worst since WWII, why didn’t the property market crash like it did in ’92? The answer, you will find, is housing benefit.

    2. CharlesJ says:

      Sorry Tom, but the reason why rents and property prices have accelerated has had little to do with Housing Benefit. In answer to your last query, Housing Benefit is not just a social policy, it’s an economic policy too – it’s job is to act as an automatic stabiliser for the economy, so in recession, HB claims increase thus partially stabilising that part of the economy – which it has done sucessfully.

      If more people had well paid jobs, then HB would not have a distorting affect at all. If sucessive governments had built more social housing (meaning lower rents), HB would not have this affect at all.

      I’ve been homeless, and I know that homelessness kills people – I’m not exaggerating! The hidden REAL costs will dwarf the HB budget in the coming years. Given that the UK is sovereign in its own currency, HB will never be a real problem – build / buy more social housing to correct the problem, and create more jobs urgently.

  2. TGR Worzel says:

    As always, there’s no mention of the impact this is having on the innocent parties in all this, i.e. the savers….

  3. Michael Jowers says:

    The record low interest rate is constantly reffered to in the news, but the base rate is meaningless to most people. The Guardian money section found the other day that the cheapest personal loan for someone with a fair credit rating is 54%, and I received a mailshot today for a credit card at 39%.

  4. BERNARD KELLY says:

    IS IT POSSIBLE FOR CHANNEL 4 NEWS ECONOMICS DIVISION TO APPROACH THE BIG CASH RICH FINANCIAL INSTITUTIONS IN THE CITY OF LONDON TO ASK THEM IF THEY ARE HELPING WITH DISASTERS RELIEF FUND FOR THE CURRENT FLOODING DISASTER IN PAKISTAN. IF THE ANSWER IS POSITIVE THEN MAYBE THIS WILL ENCOURAGE ORDINARY PEOPLE TO CONTRIBUTE.

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